I believe the notion of artificially low/high rates actually does have a precise meaning. If banks freely set rates as players in a competitive market based on prevailing inflation rates, demand for money, etc, that would be the "market rate" of money. "Artificially low" rates would be those rates set centrally which are lower than what the market rate would be in a competitive rate market.
Now it very well may be that zero would be the market rate of money, and the Fed is doing a great job of estimating it. But to say the notion of artificial rates has no meaning is a little odd.
> If banks freely set rates as players in a competitive market based on prevailing inflation rates, demand for money, etc, that would be the "market rate" of money.
But, they do.
Of course, "inflation rate" is in large part a product of monetary policy.
> Now it very well may be that zero would be the market rate of money, and the Fed is doing a great job of estimating it.
The Fed sets interest rate targets, and then directly takes action which affect those things which you suggest should be the inputs by which the market sets rates, which the market then actually takes as inputs, and sets the actual interest rates that are levied in practice.
> But to say the notion of artificial rates has no meaning is a little odd.
The notion of artificial rates has no meaning, because the things you suggest should be inputs in "natural" rates are not products of nature, but themselves "artificial" in that they are in many ways influenced by policy, and the first of them is not merely substantially influenced by monetary policy, its one of the two main things (alongside, but usually ahead of, employment) that monetary policy is aimed at controlling.
And, as a consequence, what you describe as the mechanism for "market rates" as opposed to "artificial rates" is the predominant way by which central bank interest rate targets are achieved.
Exactly. The Fed has very few mechanisms by which to inject money in the economy. Nothing they do dictates interest rates, but they can influence specific rates through open market operations. But you (and the banks) are free to charge whatever rate you want.
As the sibling says, the market rate is set by the banks - that's what LIBOR is. The central bank rate only sets an effective floor by offering a minimum coupon on government debt. This is partly why things get weird around zero.
There's no shortage of money, just a shortage of people and companies willing and able to borrow it.
(There are some subtleties here over things like the central bank "deposit window")
I believe the notion of artificially low/high rates actually does have a precise meaning. If banks freely set rates as players in a competitive market based on prevailing inflation rates, demand for money, etc, that would be the "market rate" of money. "Artificially low" rates would be those rates set centrally which are lower than what the market rate would be in a competitive rate market.
Now it very well may be that zero would be the market rate of money, and the Fed is doing a great job of estimating it. But to say the notion of artificial rates has no meaning is a little odd.